George C. considers investing in Petramco, Inc., a company that is about to intr

Question

George C. considers investing in Petramco, Inc., a company that is about to introduce some sort of a robot butcher. He plans to sell the stock in one year and predicts that it will pay $9 per share dividend at the end of the year and be worth $147. Answer questions below based on this information. (6 points)

If George requires 20% on his investment, then what is the most that he would be willing to pay for this stock today? (2 points)

If George has no way of predicting the company’s future stock price but knows that it has just instituted the policy of paying a constant dividend of $5.6 per share that is expected to continue indefinitely, then what is the most he would be willing to pay for this stock right now, given that his required return is 14%? (1 point)

If George observes this stock selling for $30 today and expects its next year’s dividend to be $2.7 per share, which is projected to grow at a constant annual rate of 2% indefinitely, then what return is the stock currently offering to him? (1 points)

If the company reports this year’s net income of $18 million and it has 4.5 million shares outstanding then what would George be willing to pay for its stock if he observes that an average industry PE ratio is equal to 5? (2 points)

Mr. Kramer is thinking about a promising investment in fat-free yogurt store chain. Credible food industry stock analysts project that the company’s dividend next year will be $4.8 per share, which is projected to increase by 4% every year and is expected to do so indefinitely. Answer the questions below based on this information. (10 points)

Based on the dividend growth model, compute the value of the company’s stock today if the investors require 12% annual return rate on similar food chain stores. (1 point)

Based on the dividend growth model, compute the value of the company’s stock in three years if investors require 16% annual return rate on similar food chain stores. (3 points)

Vandalay Industries, Inc. has been the takeover target from Kramerica for a while due to its tremendous growth rate. Stock analysts predict that the firm will pay $8 per share dividend next year, $12 per share dividend the following year and $15 per share dividend the year after. Then, dividends are expected to grow at a constant annual rate of 6%. What should be the value of the company stock today if the market required rate of return is 18%? (6 points)

Explanation / Answer

1) Price today, P0 = (D1 + P1) / (1 + r) = (9 + 147) / (1 + 20%) = $130

2) Price = Dividend / Returns = 5.6 / 14% = $40

3) Returns = D1 / P + g = 2.7 / 30 + 2% = 11%

4) Price = P/E x EPS = 5 x 18 / 4.5 = $20

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